The dollar traded near a six-month low against the euro late last week. It has been declining against most major currencies for the past several weeks. This suggests that the greenback is not immune to the Trump administration’s trade war. An escalation in the US-China trade war should be a concern for most central banks. Dollar weakness was already apparent before the trade spat. But it accelerated after the European Central Bank cut interest rates and the Bank of Japan followed suit. This suggests that the increasing scope of the trade war could create more downside pressure on the dollar. An abrupt drop in the dollar against these major currencies would also benefit exporters. But it could also hurt importers. Here’s how the dollar, European and Japanese currencies could diverge on the trade front.
What would cause the dollar to weaken?
It’s not just the uncertainty surrounding the trade war that’s spiking the dollar. The greenback is also getting hit by higher oil prices. Oil prices have been rising in recent weeks. They hit a six-year high of $80 per barrel in January. U.S. oil production is spiking. However, this has led to concerns that higher oil prices will hurt consumers. They could also drive up inflation, causing the Federal Reserve to raise interest rates. Higher interest rates could dampen the growth of American companies’ profits. This could slow the economy.
What would cause the European and Japanese currencies to weaken?
The euro and the yen have been on a tear of late. The euro has been rising against the dollar for much of the year. This has been driven by stronger-than- expected German economic growth. The yen has also been strengthening against the dollar recently. This is likely due to the yen’s exposure to weak Japanese economic growth. The Japanese government is expected to announce fiscal policy later this month that could be a sign that the country is in recession. This would lead to a weaker yen and a stronger dollar.
The potential trade war between the US and its allies
A trade war between the United States and European Union countries could push the dollar even lower. The trade conflict between the EU and the United Kingdom has been ongoing for a while now. However, the latest spat between the two to saw the British government impose punitive tariffs on imports from the EU. The British government claims that the tariffs are needed to protect the country’s farmers. The tariffs are set to go into effect on Mar 1.
Similarly, the trade war between Canada and the United States has simmered for some time now. However, the latest dispute to flare up involved steel and aluminum tariffs. Ottawa plans to impose a 25% tariff on Canadian-made steel and a 10% tariff on aluminum.
The rebound in the greenback
The dollar has been on a long-term decline against a number of major currencies. It has fallen against the euro, pound and yen over the past two years. However, it has bounced back impressively against the South Korean won and the Chinese yuan. The greenback has been supported by the rise in oil prices and the weakness of the euro. However, there is a risk that this could change. Some of these crude prices are still very low. The future oil price hike could be just a season or two away. However, it could also be several years. There is also a risk that the trade war may damage the already-weakened reputation of the dollar.
How the US trade policy could benefit exporters
Exporters could benefit from the potential strengthening of the dollar against major currencies. This would be especially true of countries that have high and volatile trade surpluses. The United States has a trade surplus of $3.5 billion with China. However, this could fall if the country decides to impose a 10% tariff on Chinese goods. This would have a negative impact on American exporters. U.S. exporters of agricultural and energy produce would suffer disproportionately.
For example, if the trade war between the US and China were to lead to a 25% tariff on Chinese imports, it would deal a serious blow to the American soybean industry and the states of Iowa and Nebraska, where much of the soybeans are grown.
How Donald Trump’s trade policies could benefit exporters
As mentioned above, one of the potential benefits of the trade war between the United States and its allies is that it could benefit exporters. By driving down the dollar, exporters could benefit from cheaper competition. They could also benefit from easier access to international finance. The United States also has a number of large and valuable tradeable surplus items with its allies. It could use this access to trade with its partners for more favorable terms.
For example, the United States currently pays $19 billion in tariffs and other trade barriers against China. By contrast, the EU pays $19 billion in tariffs and taxes on American goods. This access could be used by the United States to negotiate lower tariffs or other trade benefits.
The potential impact of the ongoing trade war between the United States and its allies can be felt around the world. Whether in the form of higher tariffs or weaker dollar, these measures could benefit exporters. The potential downside is that they could also benefit importers, who could then see the dollar move in the opposite direction.
This could end up being a good thing for the economy as a whole, but it’s important to watch carefully what happens.